In 2013 equity crowdfunding was making headlines as the new frontier for startup investment. Equidam was founded around that time, and saw significant traction in this new market. To this day we maintain partnerships with equity crowdfunding platforms around the world, such as Crowdcube, Ethis, FundedHere, Equifund and Birchal.
The timing was particularly fortunate, as online transactions require even more transparency than offline. The offer is take or leave it, you don’t have much of an opportunity to convince your investors, so laying everything out as clearly and precisely as possible is crucial. Especially when it comes to valuation.
Any regular user of Crowdfunding platforms will be aware of how often founders are asked to justify their valuation by retail investors. It’s worth answering up-front, and it’s worth answering with clarity and confidence. In this article, we’ll help you to do exactly that.
Comparable Data
Crowdfunding platforms are a convenient database of publicly disclosed valuations for private companies. It’s a good way to get your bearings at the start of this process, and understand if your expectations line up with the retail market.
Startups you look at should be similar in terms of risk and return, which means:
- The raise should be recent, to ensure that market conditions are similar.
- The startup should be at the same stage in terms of employees, product status, traction, and brand strength.
- The startup should share the same future potential, in terms of industry, market, pricing power, and potential growth.
You can also look at the major startup databases, such as Crunchbase or Dealroom, to see other recent fundraising deals which may provide landmarks for you to navigate around. As ever, the wider your pool the more you suffer from the problem with averages, and the narrower it is the harder it is to find appropriate comparisons.
You might also be tempted to check the major tech journalism outlets like TechCrunch for recent fundraising news, but proceed with caution. These startups typically make headlines because they are above average, which means their valuation is often similarly inflated.
In addition to helping you set your own expectations for valuation, this part of the process will arm you with examples and context to better defend your valuation to potential investors later. Retail investors may not always know whether a multiple is too high, but they’ll appreciate a success story that mirrors your startup’s situation.
Calculating a Valuation
Once you know roughly where you think you should stand, it’s time to see how that is reflected in reality. Or at least in reality as you expect it.
Calculating a valuation can be an eye-opening experience for founders, especially if you use it as an opportunity to thoroughly scrutinize your ambition, strategy and financial projections. Do they all connect? Have you closed the loop?
Early-stage financial projections can feel particularly taxing, like building on sand, but it’s a useful exercise – and one that you will have to address eventually. We’ve shared a few tips on how to solidify projections for early stage companies here. If you’re struggling to get started, our partner ProjectionHub has a range of templates for different industries which can make life easier.
As covered in the introduction, valuation comes with its own unique challenges when it comes to raising through Crowdfunding platforms. Particularly, retail investors have a more varied level of understanding and interest in valuation metrics – but all care as much as the professionals about getting a good deal. The solution to this is in two parts: 1) robust methodology that is based on rigorous industry standards, and 2) a detailed and transparent report which discloses data sources and calculations.
If your team has the relevant experience, performing a valuation exercise can be done in a reasonable amount of time. You can also take a look at our platform, which makes the process easy and more streamlined, or turn to a valuation consultant (in which case, please make sure they have startup experience, as valuing a startup is quite a bit different than valuing a more traditional business).
Communicate with others
The first stop on your list should be the crowdfunding platform themselves. Their interests are entirely aligned with yours, in that they want rounds closed successfully, with good outcomes for both sides of the deal. They’ll share their input, and can often connect you with mentors and experts on valuation related topics. If there is a bias in some platforms, it would be to push your valuation down slightly – as it means stronger returns for retail investors in later rounds.
Of course, almost all perspectives are valuable. Friends, other founders, subject experts. They can all help you check the assumptions that are built into your valuation – whether that’s represented in the story or in the projections. They might shed some light on the comparable companies, or on the valuation you’ve calculated.
As part of the fundraising campaign you’ll often have to do some additional fundraising. You might as well start early and pick the brains of potential investors and get their commitment before going live. They evaluate deals on a regular basis, and have significant strength in two obvious areas: a pulse on what is going on in the market and at what price deals are getting closed, and Information about the buy side – price needs to be a compromise.
Risks with crowdfunding
- Valuation: Sometimes, because of hype and the less skeptical eye of retail investors, it is possible to raise crowdfunding capital at unreasonably high valuations. It might not be immediately intuitive, but this can create huge problems for a number of reasons. Most problematic of these is if you are forced to go on to raise your next round at a lower valuation, which leaves a sour taste in the mouth for hundreds of investors which may also be some of your most loyal customers.
- Legal structure: The legal structure that bundles all the investors can have complications for future rounds. Something to be particularly wary of when using less well established platforms, but most of the big players have this pretty well nailed down. If you’re not sure, try reaching out to a couple of founders who closed recent rounds on the platform to see about their experience.
- Deal structure: Most equity crowdfunding is straight up equity, common shares, but always good to double check with the platform, rather than risk being stung later on when you’re already invested in the process.
- Raising the right amount of capital: Not all platforms or geographies can support any amount of capital. If you are reducing or increasing the funding you are raising because of the specific platform, double check that that is going to be in the best interest of the company
Conclusion
Because of the lower interaction compared to a traditional funding round, crowdfunding can be a double edged sword when it comes to valuation: There is a much greater potential to raise at an inflated valuation, with all of the problems that brings, and you’ll also have to be well prepared to defend even the most rational valuation.
Reaching out to your network and beyond to ask for feedback on all aspects of the process – including experience from startups in a similar situation – seems like the best way to get the benefits while limiting the risks.
Further resources
You can find some of our other content aimed at founders looking at crowdfunding, here:
- How to Rock Your Crowdfunding Campaign
- Crowdfunding Campaign: How To Stand Out From the Crowd
- Investment-based Crowdfunding: Why People Do Not Invest Online
Check out our crowdfunding partners who operate in a few different jurisdictions: